20 Feb Employee vs Contractor – what’s the difference?
Even if your team member is a contractor you may still be liable for contributions such as super or leave entitlements.
When engaging a new worker it is important to consider whether they will be an employee or a contractor.
There are a number of key differences between employees and contractors. These differences create different rights, risks and obligations at law.
You will need to have regard to a number of factors when considering if a worker is an employee or a contractor.
Factors to consider
The table below is not exhaustive, but outlines the main factors to consider in relation to employees and contractors.
Contact Us
| Factor | Employee | Contractor |
|---|---|---|
| Control and integration | The business has the right to exercise a high level of control over the way the worker performs the work (eg. being told when to work, how much to charge and what to wear to work). The worker is integrated into the business and often has only one “hirer”. | The worker has control over the work they are performing and how they perform it (eg. determine their hours of work and rate of pay). The worker is external to the business (not integrated to a great extent). The worker is free to work for others at the same time. |
| Taxation and superannuation | The business deducts tax from the worker’s pay. The obligations will differ subject to the structure of the business but include PAYG withholding, superannuation guarantee, fringe benefits tax and payroll tax. | The worker is responsible for all taxation and superannuation related obligations. (NB. In some circumstances, a contractor may be deemed to be an “employee” for superannuation purposes only). |
| Uniforms and business cards | The worker is required to wear a uniform and/or use and display materials (such as business cards etc) that associates them with the business. | The worker decides what he or she wears and uses/displays materials relevant to their own business. |
| Tools and equipment | The business provides the workers with tools and equipment required to perform the work. | The worker supplies and maintains their own tools and equipment (especially if expensive) in order to perform the work. |
| Mode of remuneration | The worker receives wages or a salary based on hours of work. | The worker is paid according to task/job completion. |
| Entitlements | The workers takes holidays and sick leave paid for by the business. | The worker is responsible for the management and taking of their own leave. |
What about the contract?
You should be aware that even if you refer to a worker (whether in a contract or otherwise) as an “employee” or a “contractor”, this does not necessarily mean they will be one or the other. That is, a worker may be deemed an employee at Law even if you call them a contractor.
There are very serious consequences if you get this wrong and a complaint is made to the ATO or an audit takes place. The ATO has wide ranging powers to recover Payroll Tax that should have been paid and may even recover personally from the directors of the company. The same applies to unpaid Superannuation. Interest and penalties will usually follow. There is a lot of hot water here.
When you have developed your business structure and model and are ready to engage workers, seek tailored legal advice to ensure you engage the right kind of worker for your business utilising the right kind of contract [internal link to tailored docs – contracts].
You might also want to refer to this ATO decision tool:
https://www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/
Contact us today if you require any assistance with Workplace law.
(c) Progressive Legal Pty Ltd – All legal rights reserved (2020)
Contact Us
Related Articles
Ian Aldridge is the Founder and Principal Lawyer Director at Progressive Legal. He has over 15 years experience in advising businesses in Australia and the UK. After practising in commercial litigation for 12 years in major Australian and International Law Firms, he decided to set up a NewLaw law firm in Australia and assist growing Australian businesses. Since then, he has advised over 2,500 small businesses over the past 6 years alone in relation to Intellectual Property Law, Commercial, Dispute Resolution, Workplace and Privacy Law. He has strived to build a law firm that takes a different approach to providing legal services. A truly client-focused law firm, Ian has built Progressive Legal that strives to deliver on predictable costs, excellent communication and care for his clients. As a legal pioneer, Ian has truly changed the way legal services are being provided in Australia, by building Legal Shield™, a legal subscription to obtain tailored legal documents and advice in a front-loaded retainer package, a world-first. He has a double degree in Law (Hons) and Economics (with a marketing major). He was admitted to the Supreme Court of NSW in 2005.
